Reddy, Johnson Q & A, commercial law 2009–2010 2009

Q&A COMMERCIAL LAW 2009–2010

of goods subject to a licensing requirement), the contract is not automatically discharged. The court may decide to impose a duty on one of the parties to make reasonable efforts to obtain the licence. In the absence of an express provision as to licence, there is no general rule putting the burden of obtaining a licence on one party or another, and each case would depend on the facts.14 Pagnan SpA v Tradax Ocean Transportation (1986) provided that in such cases, the court will ask itself whether the duty imposed on the seller to obtain a licence is absolute or is only to use due diligence. If the duty is to be imposed on Louise, then Louise will only be able to rely on the prohibition as a ground of discharge if she can show that reasonable efforts to procure the licence would have failed. Certainly, Louise only knew of the prohibition on 30 May, giving her only 24 hours to obtain the licence before the end of the shipment period.

The prohibition, however, is only partial, in that the regulations merely restrict the amount which a seller is allowed to export to 1,000 tons of linseed oil without a licence. In the circumstances, although in the normal course of events, a seller is not obliged to accept a smaller quantity of goods than that contracted for, the contract is not discharged but the prohibition may excuse partial performance. Louise must supply 1,000 tons of linseed oil but is excused from supplying the remaining 500 tons.15 If James refuses to accept delivery of 1,000 tons of linseed oil, Louise will be entitled to recover damages under s 50(3) of the Sale of Goods Act 1979.

Question 41

Tracey agrees to sell to Sharmaine in London 1,000 kilograms of anchovies packed in boxes, 25 kilograms in each box, fob Antwerp, payment by letter of credit on tender of documents to Suresafe Bank. The contract called for October shipment. On 3 October, Sharmaine nominates The Windswept to take the goods and Tracey arranges for the consignment to arrive at the docks shortly afterwards. Sharmaine had not booked shipping space on The Windswept but Tracey finally manages to persuade the master to take the goods on 31 October. The following day, a fire breaks out on The Windswept and the boxes containing the anchovies are wetted whilst

14See Brandt & Co v Morris & Co (1917) (where the court held that the buyers were obliged to obtain the export licence on the basis that a ship which could not legally carry goods was not an effective ship) and Pound & Co Ltd v Hardy & Co Inc (1956) (where the court found that the sellers were obliged to obtain the export licence since the licence could only be obtained by persons registered in the exporting country and as between the parties it was the sellers who were registered).

15The effect of the partial prohibition is the same as that of physical impossibility caused by the failure of a specified crop.

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the fire is being extinguished. The boxes are unloaded and repacked in boxes of 50 kilograms. They are reloaded on 2 November. The master of the ship issues a bill of lading for ‘20 × 50 kilograms anchovies shipped on 31 October’.

When Tracey presents the documents to Suresafe Bank, she is refused payment on the ground that the bill of lading shows incorrect packaging. Tracey takes the bill of lading back to the master of The Windswept, who agrees to have the anchovies repacked on the voyage and issues a fresh bill of 40 boxes of 25 kilograms of anchovies.

When the boxes arrive in London, Sharmaine discovers that the anchovies had been infected with fungus, causing the anchovies to deteriorate.

Advise the parties.

Answer plan

Although Sharmaine nominates a ship, she has not booked shipping space. This is not a fundamental breach of the contract, since Tracey does manage to load the goods on the ship nominated by Sharmaine. The problem is that the goods are damaged and then unloaded and the question of risk will need to be addressed.

Shipping documents have always played a key role in international sale contracts and the second part of this question requires you to discuss whether the bank may refuse to pay against documents which indicate incorrect packaging. The issue of packaging falls squarely within the implied term as to description under s 13 of the Sale of Goods Act 1979. Because the anchovies deteriorate, s 14 of that Act will also need to be discussed.

Answer

In the absence of further information about the express terms, the contract between Tracey and Sharmaine is a ‘classic’ fob contract. The primary duties of the buyer are to nominate an effective ship to carry the goods, to notify the seller of such nomination in time for the seller to load goods and to pay the agreed price. The seller’s primary duty is to deliver goods which comply with the terms of the contract once the seller has given his shipping instructions.

Where documentary credit is involved, the rule is that the letter of credit must be opened at the very latest before the first day of the shipment period. This is clear from Pavia & Co SpA v Thurmann-Nielsen (1952). In this question, we are not told when Suresafe Bank advised Tracey of the opening of the credit

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and, if this was on or after 1 October, Tracey is entitled to refuse to ship the goods and may treat the contract as discharged and claim damages against Sharmaine. We are told that Tracey does in fact ship the goods, thus choosing not to treat the late opening of credit (if indeed it was opened on or after 1 October) as discharging the contract.

Although Sharmaine nominates The Windswept, she has not in fact booked shipping space for the goods. It is the prime duty of an fob buyer to give ‘effective’ shipping instructions, that is, it must be possible and lawful for the seller to comply with them (Agricultores Federados Argentinos v Ampro SA (1965)). The essential point is that the seller must be instructed as to the way in which he can perform his duty to put the goods on board. Tracey, nevertheless, manages to persuade the master of The Windswept to take the goods. Sharmaine’s nomination of The Windswept is therefore adequate since the named ship can in fact take the goods, irrespective of her failure to make advance arrangements with the master. Nothing turns on this point, since if Sharmaine had not reserved shipping space in advance, she runs the risk that her shipping instructions may be ineffective, but she does not commit any breach of contract as long as Tracey is in fact able to ship the goods in accordance with the shipping instructions. Despite the fact that Tracey only managed to persuade the master of The Windswept to take the goods on the last day stipulated within the contract shipment period, all the boxes were in fact loaded by the end of that day.

A fire breaks out on The Windswept the next day, 1 November, and the boxes are unloaded. Once goods have been loaded, risk normally passes to the buyer because the seller has fulfilled his obligation to deliver the goods and nothing remains to be done by him under the contract except to tender the shipping documents for payment. Thus, Tracey need not have involved herself with the events that occurred after 31 October, and it would have been Sharmaine’s decision whether or not to claim for any damage against the underwriters if she had taken out an insurance policy.16 Because the goods are unloaded, a problem has arisen. For whatever reason, the anchovies have now been packed in boxes of 50 kilograms per box whereas the contract had stipulated for 25 kilograms per box. The bill of lading issued by the master states ‘20 × 50 kilograms anchovies shipped on 31 October’.

The requirement that goods must correspond to their description used to be a strict one, entitling the buyer to reject for quite trivial discrepancies, and to do so

16An fob seller is not obliged to take out insurance cover for the goods, but s 32(3) of the Sale of Goods Act 1979 imposes on him an obligation to ‘give such notice to the buyer as may enable him to insure [the goods] during their sea transit’. If the seller does not do so, the goods are deemed to be at the seller’s risk. However, Wimble Sons & Co v Rosenberg (1913) established that in a classic fob contract, that is, where the buyer nominates the vessel and gives the shipping instructions, the buyer will normally have sufficient information to enable him to insure so that the seller need not give further notice under s 32(3).

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even though the failure of the seller to deliver goods of the contract description does not in the least prejudice the buyer (Arcos Ltd v Ronaasen & Son (1933)).17 This is no longer the case due to s 15A of the Sale of Goods Act 1979. The buyer who is a nonconsumer can no longer reject where the breach is so slight that it would be unreasonable for him to do so.

Suresafe Bank was entitled to refuse to pay against the documents which Tracey presents, since the bill of lading does not comply with the terms of the credit because it indicates incorrect packaging. This stems from the principle of strict compliance in documentary financing. As Lord Sumner said in Equitable Trust Co of New York v Dawson Partners Ltd (1927): ‘There is no room for documents which are almost the same, or which will do just as well.’ Suresafe Bank has no discretion, in that it must comply strictly with the buyer’s instructions as to payment.18 The bank’s right to reimbursement from Sharmaine depends on it taking up a faultless set of documents and, since the bill of lading indicates incorrect packaging, Suresafe Bank was entitled to refuse to pay Tracey, no matter how minor the discrepancy may appear.

Suresafe Bank’s duty is to examine all the documents with reasonable care to ascertain whether they appear on their face to be in accordance with the terms of credit. It is not responsible for the genuineness or accuracy of the documents, merely whether they comply and Suresafe Bank has rightly refused to pay Tracey.

It appears that Suresafe Bank has notified Tracey of the reason for rejection and Tracey does have an opportunity to put right any defect and represent the document again, provided that there is time to do so in accordance with the contract of sale and the credit. Tracey thus takes the bill of lading back to the master of The Windswept who issues a fresh bill now stipulating that the cargo is of 40 boxes each containing 25 kilograms of anchovies as was required under the contract.

We are not then told what the parties’ actions were, but it is reasonable to assume that Tracey then retenders the documents to Suresafe Bank which then pays against them, since the bill of lading now indicates the correct packaging. As far as the date of shipment is concerned, the bill of lading shows 31 October and thus the documents appear on their face in apparent good order and comply with the terms of the credit. In order for Sharmaine to have taken possession of the goods on arrival, Sharmaine will have reimbursed Suresafe Bank because a bank will not release the documents until payment by its principal. Once Suresafe Bank has taken reasonable

17In Re Moore & Co and Landauer & Co (1921), it was held that goods did not comply with their description when the contract called for 3,000 tins of fruit to be packed 30 tins to a case and the seller delivered the correct number of tins, but some were packed 24 tins to a case.

18Lord Wilberforce in Reardon Smith Line Ltd v Hansen Tangen (1976) described some of the older cases as ‘excessively technical’, but that the need for certainty, particularly in international sales, outweighs the need for flexibility.

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care in scrutinising the documents, it will not be liable to Sharmaine if the documents later turn out to be forged.

Sharmaine discovers that the anchovies have deteriorated due to fungus infection. Although she has previously accepted documents, Sharmaine may be entitled to reject the goods. An fob buyer has two distinct rights of rejection. As Devlin J made clear in Kwei Tek Chao v British Traders and Shippers (1954), the right to reject documents arises when the documents are tendered, and the right to reject goods arises when they are landed and when, after examination, they are not found to be in conformity with the contract.

This would be the case if the goods suffered from some qualitative defect not apparent on the face of the documents. In Mash & Murrell v Joseph Emanuel (1961), Cyprus sugar beet were sold cif Liverpool. The sugar beet were sound when shipped but were found to be rotten on arrival. On the facts of the case, it was found that the deterioration was a result of fungus infection before or at the time of shipment. The court held that the seller was liable for the deterioration. As Diplock J said in that case: ‘. . . when goods are sold under a contract such as a cif contract or fob contract which involves transit before use, there is an implied warranty not merely that they shall be [satisfactory] at the time they are put on the vessel, but that they shall be in such a state that they can endure the normal journey and be in a [satisfactory] condition on arrival . . .’

It therefore seems that because anchovies are normally capable of enduring a sea transit, Tracey will be liable for any deterioration apparent on arrival. This implied warranty is distinct from the implied term under s 14 of the Sale of Goods Act 1979, the former relating to an undertaking that the goods can endure sea transit as opposed to s 14(2) and (3), which are implied terms relating to satisfactory quality and fitness for purpose.

Sharmaine may thus be entitled to reject the goods for breach of the implied terms as to satisfactory quality and fitness for purpose under s 14 of the Sale of Goods Act 1979, provided that the breach is not so slight so as to treat it as a breach of warranty (s 15A of the Sale of Goods Act 1979). If the anchovies no longer have commercial value, as it appears in this case, Sharmaine is likely to be entitled to reject the goods despite the fact that Tracey has already been paid against documents.

Furthermore, according to the House of Lords in Bowes v Shand (1877), stipulations as to the time of shipment form part of the description of the goods and breach of such stipulations entitles the buyer to reject. Although Bowes v Shand was decided before the Sale of Goods Act 1893, subsequent cases have acknowledged that the time of shipment is part of the description of the goods and is within s 13 of the Sale of Goods Act (Aron & Co v Comptoir Wegimont (1921)). Since the goods were not in fact shipped within the contract period, Sharmaine may be able to reject the goods on the ground that they did not constitute an October shipment. However, it is arguable whether Sharmaine can reject the goods, since s 15A of the Sale of Goods

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Act 1979 provides that where the breach is so slight that it would be unreasonable for the buyer to reject the goods and the buyer does not deal as a consumer, the breach is to be treated as a breach of warranty and not as a breach of condition. Since time is of the essence in commercial contracts, it is submitted that the breach will not be perceived as so slight for it to be treated as a breach of warranty.

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CHAPTER 11

CIF CONTRACTS

INTRODUCTION

Under a cif (cost, insurance and freight) contract, the seller is required to arrange the carriage of the goods and their insurance in transit, and all costs of such arrangements are included in the contract price. The essential duties of a cif seller are to obtain a bill of lading, a policy of insurance and any other document required by the contract, and to forward them to the buyer who pays on the invoice when he receives the shipping documents.

Shipping documents play a central role in cif contracts, particularly where documentary financing is concerned. Because the buyer in international sale contracts has two rights of rejection, he retains his right to reject the goods on arrival if they do not conform with the terms of the contract, even if he has paid against shipping documents.

Cif contracts are often concerned with the sale of unascertained goods, and issues concerning the passing of risk and property are often involved. A particular problem arises where unascertained goods are lost before the cif seller has appropriated the goods to the contract.

Question 42

Mavric agrees to buy 10,000 tons of feveroles from Edith out of the 15,000 tons of feveroles currently in Edith’s warehouse in Yarmouth, cif Hong Kong. Shortly afterwards, Edith sells to Jane the remaining 5,000 tons of feveroles, fob Bristol, Edith to make the shipping arrangements to Hong Kong. Payment was to be in cash against shipping documents on both contracts.

Edith ships all 15,000 tons on board The Evening Light and the cargo of feveroles is put into two separate holds – 10,000 tons in hold No 1 and 5,000 tons in hold No 2. The master of The Evening Light is hesitant in signing clean bills of lading because he knows of the rumour that the feveroles were suspect, having been lying in Edith’s warehouse for some time. The gossip is that the feveroles are unlikely to be usable by the time the cargo arrives in Hong Kong. Nevertheless, he is persuaded by Edith and

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signs two clean bills of lading, one relating to hold No 1 and the other to hold No 2.

Before the ship sails, the feveroles are severely wetted due to an exceptionally heavy storm. Water penetrates into both holds due to inadequate sealing of the hatch covers. The master notes on both bills of lading as follows: ‘Cargo wetted by rain after shipment.’

After the ship sails, Edith tenders the bill of lading relating to hold No 1, with the insurance policy and the invoice to Mavric who, having now heard about the rumours regarding the feveroles, refuses to pay on the ground that the bill of lading is not ‘clean’. Edith tenders the bill of lading relating to hold No 2 to Jane who also refuses to pay on the ground that because she had not been given any information about the shipping arrangements, she had not taken out an insurance policy covering the sea transit.

Advise Mavric and Jane as to their legal position.

Answer plan

Shipping documents have always played a key role in international sale contracts, and the first part of this question requires you to discuss the time when the bill of lading must be ‘clean’. The fact that Mavric has heard of rumours concerning the cargo does not entitle him to reject the documents, but he does have the right to reject the goods on arrival. The cif buyer’s two rights of rejection are separate and distinct.

As far as Jane is concerned, this is a straightforward question about the fob seller’s statutory duty under s 32(3) of the Sale of Goods Act 1979.

Answer

Both Mavric and Jane are refusing to pay against shipping documents. If these documents conform to the contract, then Mavric and Jane must accept them, otherwise they will be in breach of contract even if the goods themselves do not comply with the contract when they arrive (Gill & Duffus SA v Berger & Co Inc (1984)).

Mavric is refusing to pay on the ground that the bill of lading is not ‘clean’. A clean bill of lading is one that does not contain any reservation as to the apparent good order or condition of the goods or the packing (British Imex Industries Ltd v Midland Bank Ltd (1958)). The time to which such a reservation must relate to prevent the bill of lading from being clean is that of shipment. In The Galatia (1980), a bill of lading was issued stating that the goods had been shipped in

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apparent good order and condition, but bore a notation that they had been subsequently damaged. The court held that the notation did not prevent the bill from being clean.

Applying The Galatia to this question, Mavric cannot reject the bill of lading on the ground that the bill is not clean. The master of The Evening Light is neither bound to take samples of the feveroles nor to have them analysed nor otherwise investigate the cargo even if he is aware of rumours concerning the quality of the cargo. The master is justified in issuing a clean bill of lading. The note that was added referred to damage that occurred after loading. Thus, the bill of lading is still clean.

If Edith has tendered the shipping documents (which, in a cif contract, will include an insurance policy and an invoice in addition to a bill of lading (The Julia (1949)) in accordance with the contract, Mavric must pay against them. It seems that Mavric has wrongfully refused to do so. It should be said, however, that a buyer in international sales contracts has two rights of rejection. For non-compliance with the contractual terms, he may have a right to reject documents, and a right to reject the goods on delivery where the breach is not slight (ss 13, 14 and 15A of the Sale of Goods Act 1979). These two rights of rejection are quite distinct (Kwei Tek Chao v British Traders and Shippers (1954)). A cif buyer to whom documents have been tendered is not entitled to refuse to pay until he has examined the goods for the purpose of determining whether the goods are of the contract quality. Even if Mavric hears of the rumours and suspects that the feveroles are not in accordance with the contract, he is nevertheless bound to pay on tender of documents which are in accordance with the contract.1

Mavric is thus advised to pay against the shipping documents because by doing so, he retains his possible right to reject the goods on arrival provided that the breach is not so slight as to be treatable as a breach of warranty (s 15A of the Sale of Goods Act 1979). Certainly, even if the feveroles are of satisfactory quality on shipment but are in such a state that they cannot endure a normal sea transit, Edith will be in breach of an implied warranty entitling the buyer to claim damages (Mash & Murrell Ltd v Joseph Emanuel (1961)). This implied warranty is distinct from the implied term under s 14(1) of the Sale of Goods Act 1979, the former relating to an undertaking that the goods can endure sea transit, as opposed to s 14(2) and (3) which are implied terms relating to satisfactory quality and fitness for purpose. If the feveroles at the outset were of satisfactory quality and usable, then no action arises under s 14. But, because feveroles are normally capable of enduring a sea transit, Edith will be liable for any deterioration apparent on arrival.

1There is a controversial decision of the High Court of Australia (Henry Dean & Sons (Sydney) Ltd v O’Day Pty Ltd (1927)) which suggests that a buyer may be entitled to reject documents where the documents are, but the goods themselves are not, in accordance with the contract. The sellers, when refusing to pay against documents, are taking a risk but one that was ‘justified by the result’. This problem is yet unresolved in the English courts.

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